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A company's profit margin reveals how much of its earnings it gets to keep after it pays all of its expenses. It is a ratio of earnings to revenue. Companies with strong earnings report high profit margins compared to their counterparts. When a company posts a loss, you cannot measure profit margin in a conventional sense because there is no profit. What is required in such a situation is finding out why the loss occurred and making an adjustment to normalize earnings to calculate profit margin by excluding nonrecurring losses.

1

Locate the bottom line number, which is a net loss in this case. The bottom line number takes into account all expenses, such as cost of goods sold, depreciation, salaries and other operating expenditures subtracted from sales. Normally, the derivation of profit also deducts taxes; however, because there is a loss, there are no taxes to deduct.

2

Locate total sales or revenue, which appear as the top number on the income statement. Do not confuse sales or revenue with net sales, which deducts cost of goods sold.

3

Divide the net loss by total sales to derive the extent of the loss. Because there is a net loss, the profit margin calculation is irrelevant. For example, the profit margin calculation is -10 percent if the company reports a loss of $20 million on sales of $200 million ($-20 million divided by $200 million). What the calculation reveals is that the company spent $1.10 for every dollar in revenue.

Tips

Because the company recorded a loss, the profit-margin calculation is meaningless. However, analysts make adjustments in such cases, particularly if there was a nonrecurring item that caused the company to report a loss. Paying a lawsuit is an example of a nonrecurring loss. In this case, the analyst removes the expense of the lawsuit from the income statement to "normalize" the company's earnings so that he can calculate an adjusted profit margin. A publicly held company usually separates nonrecurring items on its income statement to show what it would have earned excluding the one-time loss or gain.